Isolation and Autarky

Besides triggering short-term disruptions in the Fifth Five-Year
Plan, China's reduction of aid to Albania had a dramatic impact on the
Balkan nation's broader economic policy after 1972. In official
parlance, Albania's rulers implemented a strategy of "socialist
construction based on the principle of self-reliance," that is, a
policy of strict autarky. In 1976 the People's Assembly constitutionally
barred the government from accepting any loan or credit from a
capitalist source and from granting concessions to or setting up joint
ventures with companies from the capitalist world. The Albanians
publicly criticized Beijing beginning in the fall of 1976, and China
ended economic aid to Albania altogether in July 1978. The break
eliminated the source of half of Albania's imports. The country had no
choice but to stimulate exports to make up the shortfall in the hard
currency needed to purchase essential supplies. Just before the
announced break, government planners prescribed a rapid increase in the
production and export of Albania's four main sources of hard-currency
income: oil, chromite, copper, and electric power. Between 1976 and
1980, exports jumped 33 percent over the preceding five-year period. In
an act indicative of its xenophobia and economic priorities, the regime
invested an estimated 2 percent of net material product in the
construction and installation of thousands of prefabricated cement
bunkers throughout the country from 1977 to 1981.

Tiranė took energetic, if extreme, steps to end Albanian dependence
on food imports, even going to the point of requiring each of the
country's districts to become self-sufficient in food production. In
order to keep people on the farms, the authorities also made rural wages
relatively more attractive and tightened travel restrictions on the
rural population. The government reduced the size of the personal plots
of collective-farm members. Police also increased harassment of peasants
who attempted to sell produce in the cities. In late 1981, the
government collectivized private livestock in the lowlands as well as
all goats and sheep in the highlands. Disaster ensued when peasants
undertook a wholesale slaughter of their herds; shortages of meat and
dairy products soon plagued the cities. Overpopulation in farm
communities further complicated efforts to achieve self-sufficiency.

Autarky proved an unsuccessful policy. The productivity growth rate
fell slowly but steadily during the Seventh Five-Year Plan (1981-85),
and the annual increase in net material product for the period 1981-88
averaged only 1.7 percent, a figure that did not even keep pace with the
country's annual population increase of more than 2 percent. Albania's
economy suffered two of its worst years in 1984 and 1985. In 1984, 1985,
1987, and 1988 the net material product decreased, and from 1986 to 1990
it declined 1.4 percent (see Table
5, Appendix). Five years of drought between 1983 and 1988 dealt
sharp setbacks to agricultural and hydroelectric power output. Power
shortages and other acute problems afflicted two of Albania's main
generators of hard-currency income, oil and chrome. As output fell,
investment contracted and caused further drops in productivity.
Insolvent enterprises turned to the state for bailouts. The shortage of
goods circulating in the economy and the government's maintenance of
fixed wage levels created repressed inflation and forced saving.

Despite clear portents of an economic catastrophe, the regime took no
radical initiatives to pull Albania out of its economic nosedive until
it was too late to avoid a major collapse. Ramiz Alia, who became
chairman of the Presidium of the People's Assembly in November 1982,
gradually assumed more decision-making power from Hoxha, who went into
semiretirement in 1983 and died in April 1985. In 1986 the Albanian
Party of Labor still fully supported a centrally planned economy. The
party's official daily, Zeri i Popullit, included the following
proclamation in January 1986: "The execution of plan tasks...by
every individual, sector, enterprise, agricultural cooperative,
district, and ministry is a great patriotic duty, a party and state
duty." A year later, Alia set to work to quash the right of the
peasant collective-farm members who still had personal plots to sell
their produce, denouncing the practice as a waste of time and a
misguided stimulation of a private market. The ambitious Eighth
Five-Year Plan (1986-90) called for an increase of about 35 percent in
national income, a 30-percent increase in industrial output, a
35-percent improvement in agricultural output, and a 44-percent increase
in exports. Targeted for investment were a hydroelectric-power plant at
Banjė in the south, a rail line connecting Durrės with the main
chromite-mining area in central Albania, new superphosphate and
ferrochrome plants, and the completion of nickel-cobalt and
lubrication-oil plants.

By late 1989, the dismantling of the communist governments of Eastern
Europe and the reintroduction of capitalism to the region were under
way, and signs of change began to appear in isolated Albania. It was
recognized that the attempt to introduce a completely socialized
agricultural sector had failed and that livestock collectivization had
been a huge blunder. Nevertheless, in September 1989 Alia told the
Eighth Plenum of the Central Committee of the APL that the leadership
would "never permit the weakening of common socialist
property." The party will never, he said, "permit that the way
be opened to the return to private property and capitalist
exploitation." At the end of his address, however, Alia said that
guaranteed employment, a cornerstone of the communist system, should be
allowed to go by the wayside. Thus, he signaled that the leadership had
indeed realized that radical changes to the country's Stalinist economic
system were necessary.

In 1990 Alia attempted to strengthen the communists' weakening hold
on power by initiating an economic reform from the top down. For the
first time, the leadership proposed broadening private economic activity
outside of agriculture and a role for market forces in determining
resource allocations for state-owned industrial enterprises. The
government relaxed central planning in agriculture, increased the
maximum allowable size of personal plots to about 0.2 hectares, and
ordered collective farms to return livestock to peasants. The reforms
provided for an expansion of enterprise self-financing and allowed local
governments to plan part of the industrial activity that took place in
their districts.

In January 1990, at the Ninth Plenum of the Central Committee, party
leaders disclosed a reform program that constituted an even more radical
departure from their purely Stalinist rhetoric of only a few months
earlier. Enterprises were divided into small units and made financially
independent, with long-term bank credits replacing state subsidies. The
package included decentralization of economic decision making. Workers
won the right to choose and dismiss enterprise directors. Wages were to
be based on plan fulfillment and enterprise profits. Supply and demand
were to determine the prices of luxury goods. Citizens were permitted to
undertake private construction for their own use. Agricultural
cooperatives were allowed to sell food in towns and set their own
prices. At the Tenth Plenum of the Central Committee in April 1990, Alia
said that as a consequence of the reforms a significant turnover had
occurred among the directors of Albania's enterprises. Resistance to the
reforms came from administrative employees unwilling or unable to adapt
to new job requirements. Some firms responded to the economic reforms by
reducing their output targets in hope of increasing their bonuses; other
firms, hoping to avoid penalties for sustaining unplanned losses,
actually planned for losses in advance.

The government failed to implement the reforms quickly enough to stem
the tide of popular unrest and prevent economic disaster. In the summer
of 1990, the existence of unemployment became apparent in Albania. A new
drought reduced supplies of electricity from Albania's hydroelectric
dams and forced plant shutdowns. Thousands of Albanians demanding visas
stormed Tiranė's few Western embassies. The first postwar opposition
political movement emerged in December 1990; riots in Tiranė and Shkodėr
in April 1991 galvanized antigovernment forces; and thousands of
Albanians fled to Greece and Italy, but most were later forcibly
returned.

By mid-1991, only a quarter of Albania's production capacity was
functioning. Industrial output in the third quarter was 60 percent less
than in the third quarter of 1990. The foreign debt reached about US$354
million in mid-1991, up from US$254 million at the end of 1990 and US$96
million at the close of 1989. Despite the paralysis in production, the
government fed inflation by issuing unbacked money to pay idle workers
80 percent of their normal wages. The opportunity to pilfer became one
of the strongest factors motivating people to go to work, and the
absence of clearly defined property rights and the breakdown of the rule
of law fueled rampant theft of both private and state-owned property.
The prolonged shutdown of production lines threatened serious damage to
equipment and other capital goods, which suffered at least as much from
plunder and cannibalization as from normal depreciation.

In the chaos, consideration of the transition costs inherent in the
changeover from a socialist to a capitalist system became irrelevant.
The coalition government that took office in June 1991 responded to the
situation by announcing that it intended to carry out radical economic
reforms including privatization of agricultural land, creation of a
legal framework necessary for the functioning of a market economy,
commercialization and privatization of economic enterprises, tight
monetary and fiscal policies, price and foreign-trade liberalization,
limited convertibility of Albania's currency, and the creation of a
social safety net. However, the coalition government fell several months
later. In April 1992, a victorious Albanian Democratic Party (ADP) took
over the government and assumed the burden of implementing badly needed
economic reforms.